PRODUCT AND SERVICE RISK DISCLOSURES AND EXECUTION POLICY FOR RETAIL CLIENTS

Transcription

1 PRODUCT AND SERVICE RISK DISCLOSURES AND EXECUTION POLICY FOR RETAIL CLIENTS

2 NCI Finance Limited is authorized and regulated by Cyprus Securities and Exchange Commission (CySEC - license no CIF ) and is Compliant with the European Communities Directive 2004/39/EC on Markets in Financial Instruments (MiFID)

3 PART I: INTRODUCTION This Disclosure Booklet cannot disclose all the risks and other significant aspects of our products, but is intended to give you information on and a warning of the risks associated with them so that you are reasonably able to understand the nature and risks of the services and of the specific types of investment being offered and, consequently, to take investment decisions on an informed basis. You should not deal in these or other products unless you understand the nature of the contract you are entering into and the extent of your exposure to risk. You should also be satisfied that the product and/or service is suitable for you in light of your circumstances and financial position and, where necessary, you should seek appropriate advice in advance of any investment decisions. Risk factors may occur simultaneously and/or may compound each other resulting in an unpredictable effect on the value of any investment. All financial products carry a certain degree of risk and even low risk investment strategies contain an element of uncertainty. The types of risk that might be of concern will depend on various matters, including how the instrument is created or drafted. Different instruments involve different levels of exposure to risk and in deciding whether to trade in such instruments or become involved in any financial products you should be aware of the following points: PART II: PRODUCTS AND INVESTMENTS Set out below is an outline of the risks associated with certain generic types of Financial Instruments, which should be read in conjunction with Parts III and IV. 1. Shares, Equity Instruments 1.1 General A risk with equity is that the company must both grow in value and make adequate dividend payments or the price will fall. The company, if listed or traded on-exchange, will then find it difficult to raise further capital to finance the business and the company's performance will deteriorate vis-a-vis its competitors, leading to further reductions in the share price. Ultimately the company may become vulnerable to a takeover or may fail. Shares have exposure to all the major risk types referred to in Part III below. In addition, there is a risk that there could be problems in the sector that the company is in. And, if the Company is private, i.e. not listed or traded on an exchange, or is listed but only traded infrequently, there is also a certain amount of liquidity risk, whereby shares could become very difficult to dispose of. 1.2 Penny Shares There is an extra risk of losing money when shares are bought in some smaller companies, including penny shares. There is a big difference between the buying price and the selling price of these shares. If they have to be sold immediately, you may get back much less than you paid for them. The price may change quickly and it may go down as well as up. 2. Warrants A warrant is a time-limited right to subscribe for shares, debentures, loan stock or government securities and is exercisable against the original issuer of the underlying securities. A relatively small movement in the price of the underlying security results in a disproportionately large movement, unfavourable or favourable, in the price of the warrant. The prices of warrants can therefore be volatile. 1

4 The right to subscribe, which a warrant confers, is invariably limited in time with the consequence that if the investor fails to exercise this right within the pre-determined time-scale then the investment becomes worthless. A warrant is potentially subject to all of the major risk types referred to in Part III below. You should not buy a warrant unless you are prepared to sustain a total loss of the money you have invested plus any commission or other transaction charges. Some other instruments are also called warrants but are actually options (for example, a right to acquire securities which is exercisable against someone other than the original issuer of the securities, often called a covered warrant). For these instruments, see 6.3 below. 3. Money-Market Instruments A money-market instrument is a borrowing for a period, generally no longer than six months, but occasionally up to one year, in which the lender takes a deposit from the money markets in order to lend (or advance) it to the borrower. Unlike in an overdraft, the borrower must specify the exact amount and the period for which he wishes to borrow. Like other debt instruments (see 4 below), money-market instruments are exposed to the major risk types in Part III below, including credit and interest rate risk. 4. Debt Instruments/Bonds/Debentures All debt instruments are potentially exposed to the major risk types in Part III below, including credit risk and interest rate risk. Debt securities are subject to the risk of the issuer's inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity. When interest rates rise, the value of corporate debt securities can be expected to decline. Fixed-rate transferable debt securities with longer maturities tend to be more sensitive to interest rate movements than those with shorter maturities. 5. Units in Collective Investment Schemes Collective investment schemes and their underlying assets are potentially exposed to all of the major risk types referred to in Part III below. There are many different types of collective investment schemes. Generally, a collective investment scheme will involve an arrangement that enables a number of investors to 'pool' their assets and have these professionally managed by an independent manager. Investments may typically include gilts, bonds and quoted equities, but depending on the type of scheme may go wider into derivatives, real estate or any other asset. There are risks on the underlying assets held by the scheme and investors should, therefore, check whether the scheme holds a number of different assets, thus spreading its risk. Subject to this, investment in such schemes can reduce risk by spreading the investor's investment more widely than may have been possible if he or she was to invest in the assets directly. The reduction in risk is achieved because the wide range of investments in a collective investment scheme reduces the effect that any one investment can have on the overall performance of the portfolio. Although, therefore, seen as a way to spread risks, the portfolio price can fall as well as rise and, depending on the investment decisions made, a collective investment scheme can be exposed to many different risks. 2

5 6. Derivatives, including Options, Futures, Swaps, Forward Rate Agreements, Derivative Instruments for the Transfer of Credit Risk, Financial Contracts for Differences 6.1 Derivatives Generally A derivative is a financial instrument derived from an underlying asset's value; rather than trade or exchange the asset itself, an agreement is entered into to exchange money, assets or some other value at some future date based on the underlying asset. There are many types of derivative, but options, futures and swaps are among the most common. An investor in derivatives often assumes a great deal of risk, and therefore investments in derivatives must be made with caution, especially for smaller or less experienced investors. Derivatives have high risk connected with them, predominantly as there is a reliance on further assets; this is unpredictable. Options or futures can allow a person to pay only a premium to bet on the direction in an asset's price, and while this can often lead to large returns if right, it would lead to a 100% loss (the premium paid) if wrong. Options or futures sold "short" (i.e. without the seller owning the asset at the time of the sale) may lead to great losses if the price of the derivative rises significantly. If a derivative transaction is particularly large or if the relevant market is illiquid (as may be the case with many privately negotiated off-exchange derivatives), it may not be possible to initiate a transaction or liquidate a position at an advantageous price. On-exchange derivatives are subject, in addition, to the risks of exchange trading generally. Offexchange derivatives are contracts entered into with a counterparty and, like any contract, subject to credit risk and the particular terms of the contract (whether one-off or a master agreement) should be considered in all cases. Derivatives can be used for speculative purposes or as hedges to manage other investment risks. In all cases the suitability of the transaction for the particular investor should be considered. You should therefore ask about the terms and conditions of the specific derivatives and associated obligations (e.g. the circumstances under which you may become obligated to make or take delivery of the underlying of a futures contract and, in respect of options, expiration dates and restrictions on the time for exercise). Under certain circumstances the specifications of outstanding contracts (including the exercise price of an option) may be modified by the exchange or Clearing House to reflect changes in the underlying asset. Normal pricing relationships between the underlying asset and the derivative may not exist in all cases. This can occur when, for example, the futures contract underlying the option is subject to price limits while the option is not. The absence of an underlying reference price may make it difficult to assess 'fair' value. The points set out below in relation to different types of derivative are not only applicable specifically to these derivatives but are also applicable more widely to derivatives generally. All derivatives are potentially subject to the major risk types in Part III below, especially market risk, credit risk and any specific sector risks connected with the underlying asset. 6.2 Futures/Forwards/Forward Rate Agreements Transactions in futures or forwards involve the obligation to make, or to take, delivery of the underlying asset of the contract at a future date, or in some cases to settle the position with cash. They carry a high degree of risk. The 'gearing' or 'leverage' often obtainable in futures and forwards trading means that a small deposit or down payment can lead to large losses as well as gains. It also means that a relatively small movement can lead to a proportionately much larger movement in the value of your investment, and this can work against you as well as for you. 3

6 Futures and forwards transactions have a contingent liability, and you should be aware of the implications of this; in particular the margining requirements associated with these products. With all exchange-traded - and most OTC off-exchange - futures and forwards, you will have to pay over in cash, losses incurred on a daily basis to meet margin requirements. If you fail to lodge margin, the contract concerned may be terminated. See further, 1 and 2 of Part IV below. 6.3 Options There are many different types of options with different characteristics subject to the following conditions. Buying options: Buying options involves less risk than selling options because, if the price of the underlying asset moves against you, you can simply allow the option to lapse. The maximum loss is limited to the premium, plus any commission or other transaction charges. However, if you buy a call option on a futures contract and you later exercise the option, you must acquire the future. This will expose you to the risks described under 'futures' and 'contingent liability investment transactions'. Writing options: If you write an option, the risk involved is considerably greater than buying options. You may be liable for margin to maintain your position (as explained in 6.2 above) and a loss may be sustained well in excess of the premium received. By writing an option, you accept a legal obligation to purchase or sell the underlying asset if the option is exercised against you, however far the market price has moved away from the exercise price. If you already own the underlying asset which you have contracted to sell (known as 'covered call options') the risk is reduced. If you do not own the underlying asset (known as 'uncovered call options') the risk can be unlimited. Only experienced persons should contemplate writing uncovered options, and then only after securing full details of the applicable conditions and potential risk exposure. Traditional options: Certain financial services firms offering services on the London Stock Exchange, under special exchange rules write a particular type of option called a 'traditional option'. These may involve greater risk than other options. Two-way prices are not usually quoted and there is no exchange market on which to close out an open position or to effect an equal and opposite transaction to reverse an open position. It may be difficult to assess its value or for the seller of such an option to manage his exposure to risk. Certain options markets operate on a margined basis, under which buyers do not pay the full premium on their option at the time they purchase it. In this situation you may subsequently be called upon to pay margin on the option up to the level of your premium. If you fail to do so as required, your position may be closed or liquidated in the same way as a futures position. 6.4 Contracts for Differences Certain derivatives are referred to as contracts for differences. These can be options and futures on the FTSE 100 index or any other index, as well as currency and interest rate swaps. However, unlike other futures and options (which may, depending on their terms, be settled in cash or by delivery of the underlying asset), these contracts can only be settled in cash. Investing in a contract for differences carries the same risks as investing in a future or an option as referred to in 6.2 and 6.3 above. Transactions in contracts for differences may also have a contingent liability. 4

7 6.5 Swaps A swap is a derivative where two counterparties exchange one stream of cash flows against another stream. A major risk of old off-exchange derivatives, (including swaps) is known as counterparty risk. If a party, A, wants a fixed interest rate loan and so swaps a variable rate loan with another party, B, thereby swapping payments, this will synthetically create a fixed rate for A. However, if B goes insolvent, A will lose its fixed rate and will be paying a variable rate again. If interest rates have gone up a lot, it is possible that A will struggle to repay. The swap market has grown substantially in recent years, with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become liquid but there can be no assurance that a liquid secondary market will exist at any specified time for any particular swap. 7. Combined Instruments Any combined instruments, such as a bond with a warrant attached, is exposed to the risk of both those products and so combined products contain a risk which is greater than those of its components generally. PART III: GENERIC RISK TYPES 1. General The price or value of an investment will depend on fluctuations in the financial markets outside of anyone's control. Past performance is no indicator of future performance. The nature and extent of investment risks varies between countries and from investment to investment. These investment risks will vary with, inter alia, the type of investment being made, including how the financial products have been created or their terms drafted, the needs and objectives of particular investors, the manner in which a particular investment is made or offered, sold or traded, the location or domicile of the Issuer, the diversification or concentration in a portfolio (e.g. the amount invested in any one currency, security, country or issuer), the complexity of the transaction and the use of leverage. The below risk types could have an impact on each type of investment: 2. Liquidity The liquidity of an instrument is directly affected by the supply and demand for that instrument. Under certain trading conditions it may be difficult or impossible to liquidate a position. This may occur, for example, at times of rapid price movement if the price rises or falls to such an extent that under the rules of the relevant exchange trading is suspended or restricted. Placing a stoploss order will not necessarily limit your losses to intended amounts, because market conditions may make it impossible to execute such an order at the stipulated price. In addition, with the off-exchange products, unless the contract terms so provide, the counterparty does not have to terminate the contract early or buy back the product. 3. Credit Risk Credit risk is the risk of loss caused by borrowers, bond obligors, or counterparties failing to fulfill their obligations or the risk of such parties credit quality deteriorating. 5

8 4. Market Risk 4.1 General The price of investments goes up and down depending on market supply and demand, investor perception and the prices of any underlying or allied investments or, indeed, sector and economic factors. These can be totally unpredictable. 4.2 Foreign Markets Any investment outside the EEA or investment with a foreign element can be subject to the risks of foreign markets, which may involve different risks from EEA markets. In some cases the risks will be greater. The potential for profit or loss from transactions on foreign markets or in foreign denominated contracts will be affected by fluctuations in foreign exchange 4.3 Emerging Markets Price volatility in emerging markets, in particular, can be extreme. Price discrepancies can be common and market dislocation is not uncommon. Additionally, as news about a country becomes available, the financial markets may react with dramatic upswings and/or downswings in prices during a very short period of time. Emerging markets generally lack the level of transparency, liquidity, efficiency and regulation found in more developed markets. For example, these markets might not have regulations governing manipulation and insider trading or other provisions designed to "level the playing field" with respect to the availability of information and the use or misuse thereof in such markets. They may also be affected by political risk. It may be difficult to employ certain risk management practices for emerging markets investments, such as forward currency exchange contracts or derivatives. 5. Clearing House Protections On many exchanges, the performance of a transaction is "guaranteed" by the exchange or clearing house. However, this guarantee is usually in favour of the exchange or clearing house member and cannot be enforced by this client who may, therefore, be subject to the credit and insolvency risks of the firm through whom the transaction was executed. There is, in any event, no clearing house for traditional options, nor normally for off-exchange instruments which are not traded under the rules of an exchange. 6. Insolvency The insolvency or default of the firm with whom you are dealing, or of any brokers involved with your transaction, may lead to positions being liquidated or closed out without your consent or, indeed, investments not being returned to you. There is also insolvency risk in relation to the investment itself, for example of the company that issued the bond or of the counterparty to the off-exchange derivatives (where the risk relates to the derivative itself. 7. Currency Risk In respect of any foreign exchange transactions and transactions in derivatives and securities that are denominated in a currency other than that in which your account is denominated, a movement in exchange rates may have a favourable or an unfavourable effect on the gain or loss achieved on such transactions. The weakening of a country's currency relative to a benchmark currency or the currency of your portfolio will negatively affect the value of an investment denominated in that currency. Currency 6

9 valuations are linked to a host of economic, social and political factors and can fluctuate greatly, even during intra-day trading. Some countries have foreign exchange controls which may include the suspension of the ability to exchange or transfer currency, or the devaluation of the currency. Hedging can increase or decrease the exposure to any one currency, but may not eliminate completely exposure to changing currency values. 8. Interest Rate Risk Interest rates can rise as well as fall. A risk exists with interest rates that the relative value of a security, especially a bond, will worsen due to an interest rate increase. This could impact negatively on other products. 9. Regulatory/Legal Risk All investments could be exposed to regulatory or legal risk. Returns on all, and particularly new, investments are at risk from regulatory or legal actions and changes which can, amongst other issues, alter the profit potential of an investment. Legal changes could even have the effect that a previously acceptable investment becomes illegal. Changes to related issues such as tax may also occur and could have a large impact on profitability. Such risk is unpredictable and can depend on numerous political, economic and other factors. For this reason, this risk is greater in emerging markets but does apply everywhere. In emerging markets, there is generally less government supervision and regulation of business and industry practices, stock exchanges and over-the-counter markets. The laws and regulations governing investments in securities may not exist in some places, and where they do, may be subject to inconsistent or arbitrary application or interpretation and may be changed with retroactive effect. Both the independence of judicial systems and their immunity from economic, political or nationalistic influences remain largely untested in many countries. Judges and courts in many countries are generally inexperienced in the areas of business and corporate law. Companies are exposed to the risk that legislatures will revise established law solely in response to economic or political pressure or popular discontent. There is no guarantee that a foreign investor would obtain a satisfactory remedy in local courts in case of a breach of local laws or regulations or a dispute over ownership of assets. An investor may also encounter difficulties in pursuing legal remedies or in obtaining and enforcing judgments in foreign courts. 10. Operational Risk Operational risk, such as breakdowns or malfunctioning of essential systems and controls, including IT systems, can impact on all financial products, but in particular for holders of shares, which equate to a part of the ownership of the company. Business risk, the risk when the business is run incompetently or poorly, could also impact on this. Personnel and organisational changes can severely affect such risks and, in general, operational risk may not be apparent from outside the organisation. 7

10 PART IV: TRANSACTION AND SERVICE RISKS 1. Contingent Liability Investment Transactions Contingent liability investment transactions, which are margined, require you to make a series of payments against the purchase price, instead of paying the whole purchase price immediately. If you trade in futures, contracts for differences or sell options, you may sustain a total loss of the margin you deposit with your firm to establish or maintain a position. If the market moves against you, you may be called upon to pay substantial additional margin at short notice to maintain the position. If you fail to do so within the time required, your position may be liquidated at a loss and you must be responsible for the resulting deficit. Even if a transaction is not margined, it may still carry an obligation to make further payments in certain circumstances over and above any amount paid when you entered the contract. Save as specifically provided by the MiFID Directive and L144(I)/2007 of the Republic of Cyprus, your firm may only carry out margined or contingent liability transactions with, or for you, if they are traded on or under the rules of a recognised or designated investment exchanges. Transactions which are traded elsewhere may be may exposed to substantially greater risks. 2. Collateral If you deposit collateral as security with your firm, the way in which it will be treated will vary according to the type of transaction and where it is traded. There could be significant differences in the treatment of your collateral, depending on whether you are trading on a recognised or designated investment exchange (see 3 below), with the rules of that exchange (and the associated clearing house) applying, or trading on another exchange or, indeed, off-exchange. You should ascertain from the firm how your collateral will be dealt with. 3. Commissions Before you begin to trade, you should obtain details of all commissions and other charges for which you will be liable. If any charges are not expressed in money terms (but, for example, as a percentage of contract value), you should obtain a clear and written explanation, including appropriate examples, to establish what such charges are likely to mean in specific money terms. In the case of futures, when commission is charged as a percentage, it will normally be as a percentage of the total contract value, and not simply as a percentage of your initial payment. 4. Suspensions of Trading and Grey Market Investments Under certain trading conditions it may be difficult or impossible to liquidate a position. This may occur, for example, at times of rapid price movement if the price rises or falls in one trading session to such an extent that under the rules of the relevant exchange trading is suspended or restricted. Placing a stop-loss order will not necessarily limit your losses to the intended amounts, because market conditions may make it impossible to execute such an order at the stipulated price. Transactions may be entered into in: a. a security whose listing on an exchange is suspended, or the listing of, or dealings in which have been discontinued, or which is subject to an exchange announcement suspending or prohibiting dealings; or 8

11 b. a grey market security, which is a security for which application has been made for listing or admission to dealings on an exchange where the security's listing or admission has not yet taken place (otherwise than because the application has been rejected) and the security is not already listed or admitted to dealings on another exchange. There may be insufficient published information on which to base a decision to buy or sell such securities. 5. Deposited Cash and Property You should familiarise yourself with the protections accorded to you in respect of cash or other property you deposit for domestic and foreign transactions, particularly in the event of a firm insolvency or bankruptcy. Cash or other property that you deposit may be held by a third party on behalf of the firm. The firm is required to exercise due skill, care and diligence in the selection, appointment and periodic review of any such third party where such cash or other property is deposited but the firm will not be liable for the solvency, acts or omissions of any such third party. In the event of a third party's insolvency, you may not recover all of your cash or other property. Certain property may be held with a third party in an omnibus account and, in the event of such third party's default, if there is a shortfall in that omnibus account, you may not recover all of your property. Certain property may be held by a third party outside Cyprus (which may also be outside the European Economic Area ("EEA")), and as such, the legal and regulatory regime applying to (and therefore your rights relating to) any such property may be different from that of Cyprus (or elsewhere in the EEA). It may not be possible for that property (other than cash) to be separately identifiable. For this reason, you may not get back the same assets which you deposited. The extent to which you may recover your cash or other property may also be governed by specific legislation or local rules. In some jurisdictions, property, which had been specifically identifiable as your own, will be pro-rated in the same manner as cash for purposes of distribution in the event of a shortfall. Your cash or other property may be deposited with a third party who may have a security interest, lien or right of set-off in relation to that property. 6. Stabilisation Transactions may be carried out in securities where the price may have been influenced by measures taken to stabilise it. Stabilisation enables the market price of a security to be maintained artificially during the period when a new issue of securities is sold to the public. Stabilisation may affect not only the price of the new issue but also the price of other securities relating to it. Regulations allow stabilisation in order to help counter the fact that, when a new issue comes on to the market for the first time, the price can sometimes drop for a time before buyers are found. Stabilisation is carried out by a 'stabilisation manager' (normally the firm chiefly responsible for bringing a new issue to market). As long as the stabilising manager follows a strict set of rules, he is entitled to buy back securities that were previously sold to investors or allotted to institutions which have decided not to keep them. The effect of this may be to keep the price at a higher level than it would otherwise be during the period of stabilisation. 9

12 The Stabilisation Rules limit the period when a stabilising manager may stabilise a new issue; a. fix the price at which he may stabilise (in the case of shares and warrants but not bonds); b. and require him to disclose that he may be stabilising but not that he is actually doing so. The fact that a new issue or a related security is being stabilised should not be taken as any indication of the level of interest from investors, nor of the price at which they are prepared to buy the securities. 7. Non-Readily Realisable Investments Both exchange listed and traded and off-exchange investments may be non-readily realisable. These are investments in which the market is limited or could become so. Accordingly, it may be difficult to assess their market value and/or to liquidate your position. 8. Euronext LIFFE ("LIFFE"): Exclusion of Liability NCI Finance conducts its derivatives trading business through Euronext LIFFE, which is the derivatives arm of the pan-european stock exchange Euronext. You understand that business on the London International Financial Futures ("LIFFE") market operated by LIFFE may from time to time be suspended, restricted or closed for such period as may be determined in the interests of maintaining a fair and orderly market in accordance with the Rules of LIFFE. Any such action may result in our, and through us your, being prevented from or hindered in entering into Transactions in accordance with the Rules of LIFFE. We and the Exchange wish to draw to your attention that, inter alia, business on the market may from time to time be suspended or restricted or the market may from time to time be closed for a temporary period or for such longer period as may be determined in accordance with LIFFE's Rules on the occurrence of one or more events which require such action to be taken in the interests of, inter alia, maintaining a fair and orderly market. Any such action may result in our being unable, and through us, you being unable to enter into contracts in accordance with LIFFE's Rules. Furthermore we, and through us you, may from time to time be prevented from or hindered in entering into contracts in accordance with LIFFE's Rules as a result of a failure of some or all market facilities. We and the Exchange wish to draw the following exclusion of liability to your attention. Unless otherwise expressly provided in LIFFE's Rules or in any other agreement to which the Exchange is party, we and the Exchange shall not be liable to you for loss (including any indirect or consequential loss including, without limitation, loss of profit), damage, injury or delay, whether direct or indirect, arising from any of the circumstances or occurrences referred to above or from any act or omission of the Exchange, its officers, employees, agents or representatives under LIFFE's Rules or pursuant to the Exchange's obligations under statute or from any breach of contract by or any negligence howsoever arising of the Exchange, its officers, employees, agents or representatives. 10

13 LIFFE has a number of powers which, if exercised, may impact upon our ability to submit an order on behalf of you or which may lead to the cancellation of an order after submission to the LIFFE CONNECT Trading Host prior to execution. In particular, in addition to the powers already available to LIFFE (including those in relation to investor protection and proper markets), you should be aware that, in respect of LIFFE CONNECT : LIFFE has the power to suspend our access, or access via a particular ITM or ITMs, following a single warning, and to terminate our access under certain conditions; LIFFE will cancel all outstanding orders on our default; orders outside the price limits will be rejected automatically by the Trading Host; all orders (with the exception of GTC orders) will be cancelled automatically at Market Close or when the ITM under which the order was submitted is logged out without the order being transferred to an alternative ITM; all orders (including GTC orders) will be cancelled at close of business on the Last Trading Day of the expiry month to which they relate; and all orders (with the exception of GTC orders) will be cancelled automatically if the Trading Host fails. For the purposes of this Annex, the terms "GTC order", "ITM", "Last Trading Day", "LIFFE CONNECT ", "Market Close" and "Trading Host" shall have the meanings ascribed to them in the LIFFE Rules. 9. Stock Lending The effect of lending securities to a third party is to transfer title to them to the borrower for the period that they are lent. At the end of the period, you get back securities of the same issuer and type. The borrower's obligation to transfer equivalent securities is secured against collateral. Lending securities may affect your tax position. 10. Strategies Particular investment strategies will carry their own particular risks. For example, certain strategies, such as 'spread' position or a 'straddle', may be as risky as a simple 'long' or 'short' position. 11

14 PART V: CLIENT CATEGORISATION We are required by the provisions of the MiFID Directive and Law 144(1)/2007 of the Republic of Cyprus to categorise you either as a retail client, a professional client or an eligible counterparty We have categorised you as a retail client. However, you may request to be categorised as a professional client rather than as a retail client, either generally or in respect of specific circumstances. As a professional client, however, you would be entitled to fewer protections under the MiFID Directive and Law 144(1)/2007 of the Republic of Cyprus. Set out below is a description of the main differences in the protections owed to retail clients and professional clients so that you are aware of the protections you would lose in opting up to professional client status. Were we to treat you as a professional client, you would be entitled to fewer protections under the MiFID Directive and Law 144(1)/2007 of the Republic of Cyprus. a. we would be subject to fewer information, form and content requirements when communicating with you; b. you would be given fewer information disclosures with regard to the firm, its services and any investments (for example on costs, commissions, fees and charges, holding of client money and assets and conflicts of interest); c. where we assess whether a product or service is appropriate for you, we could assume that you have the necessary level of knowledge and experience to understand the risks involved in relation to it; d. were we ever required to assess the suitability of a personal recommendation made to you, we could assume that you have the necessary experience and knowledge to understand the risks involved, and could assume that you are able financially to bear any investment risks consistent with your investment objectives; e. when providing you with best execution, we would not be required to prioritise the overall costs of the transaction as being the most important factor in achieving best execution for you; f. we would be required to provide you with less detailed information on the general nature and risks of certain investment types known as designated investments; g. we would be subject to fewer requirements with respect to reporting on the services that we provide to you; and h. we would be subject to different rules in relation to any client money and client assets that we hold on your behalf; i. In the event that you request to be categorised as a professional client, we will provide you with a more complete explanation of the protections and investor compensation rights that you may lose as a result of such re-categorisation. j. Please contact us if you require further information on the matters set out above. 12

15 Summary Description of Conflicts of Interest Policy 1. Introduction In order to manage the potential conflicts of interest that may arise through the multiple capacities in which NCI Finance Limited ("NCI Finance") acts, NCI Finance has adopted a conflicts of interest policy which: identifies potential situations for conflicts of interest that could arise in the course of providing services, both between the interests of the Client and the interests of NCI Finance (including its managers, employees, agents etc.) and between the interests of the Client and other customers; sets out the procedures and measures to be adopted by NCI Finance to manage these conflicts. This document describes in summary form NCI Finance's conflicts of interest policy. You may request further details of that policy. 2. Identified Conflicts Where NCI Finance or an affiliate provides services to a Client, NCI Finance or that affiliate, or some other person connected with them, may: have an interest, relationship or arrangement that is material in relation to the investment, transaction or service concerned; or be acting for another client to which it owes a duty which may conflict with the duty to the Client, or which other client has an interest which conflicts with the Client's interest. When NCI Finance or an affiliate provides services to a Client, interests and duties giving rise to the conflicts described above could, by way of example, arise in circumstances where NCI Finance or an affiliate could be: a. acting as agent or arranging a transaction for an affiliate, or some other person connected with them, or another customer or investor and also acting as agent for the Client in the same transaction, and receiving and retaining commission or other charges from both parties; b. buying or selling units in a collective investment scheme where it or an affiliate, or some other person connected with them, is the trustee, operator (or an adviser of the trustee or operator) or distributor of the scheme; c. executing a transaction for or with the Client in circumstances where it or an affiliate has knowledge of other actual or potential transactions in the relevant investment or has a long or short position in the relevant investment; and d. holding a long or short position in, or trading, dealing or market-making in, investments purchased or sold by the Client. 13

16 3. Procedures and Measures Adopted to Manage Conflicts NCI Finance adopts such of the following procedures and measures as it considers necessary and appropriate to ensure that, in relation to each identified conflict, NCI Finance acts with the requisite degree of independence and that the identified conflict does not give rise to a material risk of damage to the interests of its clients. For each conflict, NCI Finance will adopt one or more of the procedures and measures stated below but not every such procedure and measure will be applicable to every conflict. Information Barriers ("Chinese Walls") Members of NCI Finance staff are under a general duty to respect the confidentiality of client information and not to pass it on or make use of it inappropriately. In certain particularly sensitive cases, NCI Finance has adopted more specific procedures (commonly known as "Chinese Walls") to prevent or control the exchange of information between relevant persons engaged in activities involving a risk of a conflict of interest where the exchange of that information may harm the interests of one or more clients. Persons within a Chinese wall are not permitted to pass on information to those outside the Chinese wall except where appropriate to the service being provided to the client. Persons outside a Chinese wall are not permitted access to information held within the Chinese wall, except in appropriate cases. Where appropriate, Chinese Walls are implemented by physical segregation of premises with appropriate access control, use of code names, appropriate security measures for papers and files (such as a "clear desk policy" and restrictions on taking documents out of the office) and for computer systems (including use of appropriate passwords and encryption). Discussion of sensitive matters in common areas of NCI Finance premises or in public places is restricted. Compliance staff and certain senior managers are entitled to see information on both sides of a Chinese wall where appropriate to their compliance or managerial function. Separate Supervision Where appropriate, persons whose principal functions involve carrying out activities on behalf of, or providing services to, clients whose interests may conflict, or who otherwise represent different interests that may conflict, including those of the firm may be subject to separate supervision. Separate supervision will not, however, normally be considered appropriate for staff who simply act for more than one client. Remuneration Policy NCI Finance remuneration policy seeks to remove any direct links between the remuneration of relevant persons principally engaged in one activity and the remuneration of, or revenues generated by, different relevant persons principally engaged in another activity, where a conflict of interest may arise in relation to those activities. Remuneration (and bonuses in particular) may, however, be calculated by reference to the profitability of (i) the department or other business unit for which the employee works or (ii) relevant NCI Finance company or (iii) the NCI Finance group as a whole. Inappropriate Influence NCI Finance has adopted a policy which prevents or limits any person from exercising inappropriate influence over the way in which a relevant person carries out services or activities. 14

17 Segregation of Function Where appropriate, NCI Finance takes steps to prevent or control the simultaneous or sequential involvement of a relevant person in separate services or activities where such involvement may impair the proper management of conflicts of interest. Inducement Policy NCI Finance has established a policy on the circumstances in which it will accept inducements from third parties. This policy permits such inducements only where, inter alia, the payment of the fee or commission, or the provision of the non-monetary benefit, is designed to enhance the quality of the service to the client; and it does not impair NCI Finance's duty to act in the client's best interests. Personal Account Dealing NCI Finance has established a personal account dealing policy which imposes certain restrictions, approval procedures and reporting requirements in relation to personal account dealings. In certain limited cases where personal dealing would be inappropriate, there is a prohibition on such personal dealing. Otherwise, subject to compliance with this policy, NCI Finance staff is permitted to deal for their personal account. In all cases pre-approval of transactions are required from management. Investment Research Policies NCI Finance does not currently offer investment research services. Should, in the future, NCI Finance and its affiliates be engaged in investment research activities, they will establish policies in relation to the production and dissemination of investment research. Research analysts engaged in the preparation of investment research will be prevented from acting in client-facing roles, and where possible there will be Chinese Walls segregating the research analysts from the trading desks. Additionally, there will be restrictions on the timing of the release of investment advice to clients and to NCI Finance, such that NCI Finance will not be in possession of investment research before its clients. Independence Policy NCI Finance operates a policy of independence which requires its employees to disregard any interest of the NCI Finance group when providing services to the Client. Declining to Act NCI Finance, or an affiliate, may also decline to act where it believes there is no other practicable way of ensuring that the Client and their other clients are treated fairly. Where the above procedures are not sufficient to ensure with reasonable confidence that risks of damage to the interests of the Client will be prevented, NCI Finance will clearly disclose the general nature and/or sources of the conflicts of interest to the Client before undertaking business for the Client. 15

18 EXECUTION POLICY 1. Purpose Under the provisions of the MiFID Directive and Law 144(1)/2007 of the Republic of Cyprus we are required to provide to you our policy on executing orders, including best execution, which is designed to enable us to take all reasonable steps to obtain the best possible result for your orders, but is not a guarantee of such results in all transactions. 2. Application This Policy applies to execution of orders on your behalf if you are a Retail or Professional Client and where, in accordance with market practice and/or the nature of the Transaction, we are providing to you a service, which includes obtaining the best possible execution result in accordance with the provisions of the MiFID Directive and Law 144(1)/2007 of the Republic of Cyprus. As a result, it does not apply to the following: a. Eligible counterparties b. Dealing on a Request for Quotation ('RFQ') basis Where we quote a price to you at your request, we will not be receiving from you a "client order" within the provisions of the MiFID Directive and Law 144(1)/2007 of the Republic of Cyprus and as such the the provisions of the MiFID Directive and Law 144(1)/2007 of the Republic of Cyprus on best execution will not apply in determining the price given to you. c. Direct Market Access Typically, where you have direct market access through an electronic service referred to in NCI Finance's Terms of Business, these links only to certain exchanges and the timing or price of execution is not part of the service that we provide to you. As such, you are deemed to execute the order yourself and the best execution requirements do not apply to us. d. Specific Instructions Where we have accepted specific instructions from you, we will follow them, and therefore will not be obliged to follow this Policy if there is a conflict. For example, you may tell us that you want us to execute your trade in UK securities on the London Stock Exchange. We will have no further responsibility for selecting the venue of execution, but will retain any discretion over other aspects of the execution in relation to which you have not given us a specific instruction, such as timing. You may give us specific instructions in relation to (for example): a specific venue; and/or a specific broker for execution; and/or a specific timeframe; and/or a specific price. You should be aware that any such specific instruction may, by its very nature, prevent us from taking the steps set out in this Policy to obtain the best possible result for the execution of your orders. 16

19 In some situations best execution will be owed, however the nature of the Transaction means that there are no other Transactions against which to compare, and as such we will not be able to apply the best execution criteria as set out in this Policy in achieving the best results for you. This may be the case for the following types of Transactions: e. Highly structured Transactions In relation to highly structured off-exchange Transactions, due to the unique contractual structure entered into between us, it is not possible to provide any comparisons with other transactions or instruments. f. Single Venue Transactions By being available at only one trading venue, the nature of the following Transactions result in there being only one price that can be taken for them and, therefore, preclude the use of comparable prices. Best execution will effectively be provided by executing the trade on the single venue at which it is available. Subject to (a)-(f) above, this Policy applies: to orders we receive and execute or orders we pass on for execution by another brokerdealer (including affiliates); and if we agree to: i. achieve the best price for you or best other terms; or ii. execute at a specific "limit" for you; or iii. execute when the price reaches a certain level without speaking to you first (or communicating to you that the level has been reached and requesting your agreement to then execute); or iv. give you a quote and pass on any price improvement we can obtain. 3. Achieving Best Execution In order to achieve best execution, we have to take all reasonable steps to obtain the best possible results for our Retail and Professional clients. There is no guarantee that the best possible price will be obtained in all circumstances and, in any event, the factors that we consider in obtaining best execution may lead to a different result in a particular Transaction; In practical terms, this means selecting execution venues which consistently deliver best execution taking into account the execution factors listed in Section 4 below; When we are receiving and transmitting orders, the execution venues will be the brokers we pass orders on to; Where we are dealing with a complex product (i.e. the instrument is made up of more than one component) best execution would be assessed by reference to overall product rather than each constituent part. 17

20 4. The Factors In obtaining best execution, we take into account a number of factors, including: price; costs; speed; likelihood of execution and settlement (liquidity); s i z e ; nature of the Transaction; type and characteristics of the instrument; characteristics of the possible execution venues; and any other consideration relevant to the execution of the particular order. We will determine which factors we need to take into account and the importance of each factor in achieving the best possible result. This will differ depending on: the type of client you are, including your characterization as a Retail or a Professional Client; the characteristics of your order; the characteristics of the financial instruments your order relates to; and the characteristics of the venues (if there is more than one) where your order can be executed. For a Retail Client, price (including costs of execution passed on to the client) will determine best execution. The other factors are relevant in achieving best price. For Professional Clients, price will usually be the most important factor although we will, as appropriate, take into account the other factors to such an extent and in such order of priority as is applicable to the particular circumstances of the order. 5. Passing on Orders for Execution On occasion we may pass an order on to another broker-dealer to execute, for example if we do not have membership of a local exchange. When the other broker-dealer is within the EEA, we rely on the fact that it will be acting in accordance with its best execution policy, which must be to EEA standards. Where we are dealing with brokers who are not located in the EEA, we will generally require the broker to provide us with best execution within the meaning of MiFID. 6. Trading Venues As part of our duty to obtain best execution, we will consider which trading venue is the most suitable to obtain the best results for you. We may execute orders at any of the following venues: on a regulated exchange; or on a multi-lateral trading facility; or, where we have sought and obtained your consent to do so; on an unregulated exchange; from the book of another broker or investment firm. 18